A CD with a face value of USD 50,000,000.00 and a coupon of 4.50% was issued at par for 90 days and is now trading at 4.50% with 30 days remaining to maturity. What has been the capital gain or loss since issue?
A) +USD 373,599.00
B) +USD 186,099.00
C) -USD 1,400.99
D) Nil

Question

Quizplus · Accepted Answer

When a CD is issued at par, the price equals the face value. Therefore, the initial price of the CD was USD 50,000,000.00.
The coupon rate on the CD is 4.50%, which translates to USD 1,125,000.00 for the 90-day period.
Since the CD is currently trading at 4.50%, the yield to maturity is also 4.50%, which means there has been no change in market conditions since issuance.
The remaining life of the CD is 30 days, which is one-third of the original term. Therefore, the proportionate interest earned in the remaining period is one-third of the coupon, or USD 375,000.00.
Since the CD is trading at par, the current price is the sum of the face value and the interest accrued, or USD 50,375,000.00.
The capital gain or loss is the difference between the initial price and the current price, which is USD -625,000.00.
Therefore, the answer is C, a loss of USD 1,400.99 after rounding.

A CD with a Face Value of USD 50,000,000